Intel earned 98 cents a share, including a 4-cent tax gain, overtaking the consensus estimate of 90 cents. However, the results trailed year-ago earnings of $1.06 and sales of $6.5 billion were only marginally higher than year-ago revenue of $6.4 billion.

Wednesday, Intel shares closed down 1 1/2 at 75 1/2.

AMD posted a narrower-than-expected loss of 9 cents a share, surpassing estimates of a 14-cent loss. Sales rose 3 percent to $613.2 million from $496.9 million in the fourth quarter of 1996.AMD said sales of its K6 processors, slated to compete with Intel's Pentium MMX chips, rose to $190 million, a 26 percent increase from the third quarter. However, the company said it was still unable to achieve maximum production of the chips.

AMD shares closed down 2 3/8 at 18 1/2. Initially, Wall Street reacted positively to the reports, as shares soared in after-hours trading. CS First Boston analyst John Geraghty said Intel's results were in line with his expectations. "They mentioned previously that original equipment manufacturers had reduced buying, so revenue growth was where I expected it to be."

"The knee-jerk reaction will be to buy the stocks because earnings weren't the disaster they could have been," Dan Niles of BancAmerica Robertson Stephens predicted, "But it will become clear that things are not as good as they seem."

Lower margins

Although Intel trounced Wall Street's consensus estimate, it projected flat revenue growth and lower gross margins in the first quarter. The company said it expects revenue in the traditionally-slower first quarter to be flat with fourth-quarter sales. Furthermore, the company expects its gross margin to drop "a few points" from 59 percent in the fourth quarter, due to price erosion of previously-purchased components.

Fourth-quarter revenue from both Asia-Pacific and Japan decreased from third-quarter levels, Intel said, and the company does not foresee a recovery in those regions. Asia-Pacific sales decreased to 17 percent of total revenue from 20 percent, while sales in Japan decreased to 8 percent from 10 percent. Geraghty expects revenue from China and India to offset weakness in Japan and Korea, since those regions compose only about 4 percent of Intel's revenue.

The decline will continue throughout the year, as the company sees fiscal 1998 gross margins of about 55 percent, and a long-term gross margin percentages of about 50 percent. Those figures are at the lower end of many analysts' projections.

Asia concerns take a backseat to other issues for Intel, according to analysts. Michael Andrew Gumport, chip analyst for Lehman Brothers, downgraded the stock to a "neutral" from "outperform." Gumport said the company's 1998 guidance met his expectations. "I flagged the stock back in February and again in July on competitive pricing pressures," Gumport said.

Gumport is concerned about competition from the sub-$1,000 PC market. The average selling price of Intel chips has fallen to $215 from $250 in 1997, as inexpensive PCs gobbled up as much as 40 percent of retail sales in recent months.

Niles believes the decline in gross margins will pressure the stock going forward. "They've said margins will be lower for the next couple of quarters, and that will lower the share price. A stock becomes hard to own when the margins are falling." Niles believes the stock is fairly valued at current levels.

Neither Niles nor Gumport expect earnings growth from Intel in fiscal 1998. "Earnings will be flat to lower this year," said Niles.

High demand

The outlook for AMD is even more bearish. The company continues to have difficulty producing K6 chips in high enough volume to meet demand. The chips are faster than Intel's Pentium MMX, but cost significantly less. AMD is marketing the chips for use in mid- and low-priced PCs.

The company said it is still working to increase production of the K6 chips, which reached only 1.5 million shipments in the fourth quarter. "While the company has a blue chip customer base, its ability to meet its product mix/unit requirements remains questionable," said Ashok Kumar, semiconductor analyst for Loewenbaum & Co. Inc. Send or read General Feedback StockChat is a free service from CBS MarketWatch Gumport said AMD's production problems are hindering its ability to compete with Intel. Niles said that although AMD has gained 5 of the top 10 computer makers as customers, production issues will continue to put profits at risk.

Increasing pricing pressure is an issue for both Intel and AMD. While Intel has a hold on the high-end and AMD dominates the low-end, the $1,500 to $2,000 PC market is becoming a pricing battleground. Both companies are also participants in the flash memory market, which is experiencing pricing pressure with little revenue growth.

In light of lower-than-expected earnings from Motorola Inc.
MSI, -0.37%
on Monday, optimism about the chip industry in 1998 is waning. Although the industry is still forecasting growth of 13 to 17 percent in 1998, chip earnings reports so far haven't instilled much confidence in investors.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.